01 Porters Generic Strategies and more

MANAGEMENT POLICY AND STRATEGY SESSION - VI:

Prof.Sushil\IITD\Session-VI 1 MANAGEMENT POLICY AND STRATEGY SESSION - VI Generic and Grand Strategies Prof. Sushil Department of Management Studies Indian Institute of Technology, Delhi INDIA Email: sushil@dms.iitd.ernet.in

Generic Strategies:

Prof.Sushil\IITD\Session-VI 2 Generic Strategies Differentiation Low-cost leadership Focus

PORTER’S GENERIC STRATEGIES :

Prof.Sushil\IITD\Session-VI 3 PORTER’S GENERIC STRATEGIES 1. Cost Leadership 2. Differentiation 3 A. Cost Focus 3 B. Differentiation Focus Narrow Target Broad Target Differentiation Lower Cost Competitive Advantage Competitive Score

REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIES:

Prof.Sushil\IITD\Session-VI 4 REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIES Generic Commodity Required Common Organizational Strategy Skills and Resources Requirements Overall cost  Sustained capital investment  Tight cost control leadership access to capital  Frequent, detailed control reports  Process engineering skills  Structured organization and responsibilities  Intense supervision of labour  Incentives based on  Products designed for ease meeting strict quantitative  Low-cost distribution system targets in manufacture Differentiation  Strong marketing abilities  Strong coordination  Product engineering among functions in R&D,  Creative flare product development, and marketing

REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIES CONTD…:

Prof.Sushil\IITD\Session-VI 5 REQUIREMENTS FOR GENERIC COMPETITIVE STRATEGIES CONTD…  Strong capability in basic  Subjective measurement and research incentives instead of quantitative measures  Corporate reputation for  Amenities to attract highly quality or technological skilled labour, scientists, or leadership creative people  Long tradition in the industry or unique combination of skills drawn from other businesses  Strong cooperation from channels Focus  Combination of the above  Combination of the above policies policies directed at the directed at the regular strategic particular strategic target target

RISKS OF THE GENERIC STRATEGIES:

Prof.Sushil\IITD\Session-VI 6 RISKS OF THE GENERIC STRATEGIES Risks of Cost Leadership Risks of Differentiation Risk of Focus Cost of leadership is not Differentiation is not The focus strategy is sustained initiated sustained:  Competitors imitate The target segment Competitors imitate:  Bases for differentiation becomes structurally unattractive Technology changes becomes less imported to  Structure erodes Other bases for cost buyers  Demand disappears leadership erode Proximity in differentiation Cost proximity is lost Broadly targeted is lost competitors overwhelm the segment:  The segment’s differences from other segments narrow  The advantages of a broad line increase Cost focusers achieve Differentiation focusers New Focusers sub-segments even lower cost in segments achieve even greater the industry differentiation in segments

STAGE OF `INDUSTRY’ DEVELOPMENT:

Prof.Sushil\IITD\Session-VI 7 STAGE OF `INDUSTRY’ DEVELOPMENT Keeping ahead of the field Cost leadership Raise barriers Deter competitors Redefine scope Divest peripherals Encourage departures Imitation at lower cost Joint ventures Differentiation Focus Differentiation New opportunities Leader Follower Growth Maturity Decline Strategic position of organization

Types of Grand Strategies:

Prof.Sushil\IITD\Session-VI 8 Types of Grand Strategies Consortia Concentrated Growth Market Development Product Development Innovation Horizontal Integration Vertical Integration Concentric Diversification Conglomerate Diversification Turnaround Divestiture Liquidation Bankruptcy Joint Ventures Strategic Alliances

Characteristics of a Concentrated Growth Strategy:

Prof.Sushil\IITD\Session-VI 9 Characteristics of a Concentrated Growth Strategy Involves focusing resources on the profitable growth of a single product, in a single market, with a single dominant technology Rationale - Firm develops and exploits its expertise in a delimited competitive arena Determinants of competitive market success Ability to assess market needs Knowledge of buyer behavior Customer price sensitivity Effectiveness of promotion

Conditions Favoring a Concentrated Growth Strategy :

Prof.Sushil\IITD\Session-VI 10 Conditions Favoring a Concentrated Growth Strategy Firm’s industry is resistant to major technological advancements Firm’s targeted markets are not product saturated Firm’s markets are sufficiently distinctive to dissuade competitors in adjacent markets from entering firm’s segment Firm’s inputs are stable in price and quantity and available in amounts and at times needed Firm’s industry is stable Firm’s competitive advantages are based on efficient production or distribution channels Success of market generalists

Strategies of Market and Product Development:

Prof.Sushil\IITD\Session-VI 11 Strategies of Market and Product Development Market development Consists of marketing present products, often with only cosmetic modifications, to customers in related market areas by Adding channels of distribution or Changing content of advertising or promotion Product development Involves substantial modification of existing products or creation of new but related products Based on penetrating existing markets by Incorporating product modifications into existing items or Developing new products connected to existing products

Specific Options for Selected Grand Strategies:

Prof.Sushil\IITD\Session-VI 12 Specific Options for Selected Grand Strategies Concentration: Increasing use of present products in present markets 1. Increasing present customers’ rate of use: a. Increasing size of purchase b. Increasing rate of product obsolescence c. Advertising other uses d. Giving price incentives for increased use 2. Attracting competitors’ customers a. Establishing sharper brand differentiation b. Increasing promotional effort c. Initiating price cuts 3. Attracting nonusers to buy the product a. Inducing trial use through sampling, price incentives, and so on b. Pricing up or down c. Advertising new uses

Specific Options for Selected Grand Strategies (continued):

Prof.Sushil\IITD\Session-VI 13 Specific Options for Selected Grand Strategies (continued) Market Development: Selling present products in new markets 1. Opening additional geographic markets a. Regional expansion b. National expansion c. International expansion 2. Attracting other market segments a. Developing product versions to appeal to other segments b. Entering other channels of distribution c. Advertising in other media

Specific Options for Selected Grand Strategies (concluded):

Prof.Sushil\IITD\Session-VI 14 Specific Options for Selected Grand Strategies (concluded) Product Development: Developing new products for present markets 1. Developing new product features a. Adapt (to other ideas, developments) b. Modify (change color, motion, sound, odor, form, shape) c. Magnify (stronger, loner, thicker, extra value) d. Minify (smaller, shorter, higher e. Substitute (other ingredients, process, power) f. Rearrange (other patterns, layout, sequence, components) g. Reverse (inside out) h. Combine (blend, alloy, assortment, ensemble; combine units, purposes, appeals, ideas) 2. Developing quality variations 3. Developing additional models and sizes (product proliferation)

Innovation Strategy:

Prof.Sushil\IITD\Session-VI 15 Innovation Strategy Involves creating a new product life cycle, thereby making similar existing products obsolete

Strategies of Horizontal and Vertical Integration:

Prof.Sushil\IITD\Session-VI 16 Strategies of Horizontal and Vertical Integration Horizontal integration Based on growth via acquisition of one or more similar firms operating at the same stage of the production-marketing chain Involves eliminating competitors, providing acquiring firm with access to new markets Vertical integration Involves acquiring firms To supply acquiring firm with inputs - backward integration or Are customers for firm’s outputs - forward integration

Vertical and Horizontal Integrations:

Prof.Sushil\IITD\Session-VI 17 Acquisitions or mergers of suppliers or customer businesses are vertical integrations Acquisitions or mergers of competing businesses are horizontal integrations Textile producer Shirt manufacturer Clothing store Textile producer Shirt manufacturer Clothing store Vertical and Horizontal Integrations

Motivations Related to Diversification Strategies:

Prof.Sushil\IITD\Session-VI 18 Motivations Related to Diversification Strategies Increase growth rate of firm Investment is better use of funds than using them for internal growth Improve stability of earnings and sales Balance or fill out product line Diversify product line Acquire a needed resource quickly Achieve tax savings Increase firm’s stock value Increase efficiency and profitability

Diversification Strategies:

Prof.Sushil\IITD\Session-VI 19 Diversification Strategies Concentric diversification Involves acquisition of businesses related to acquiring firm in terms of technology, markets, or products Conglomerate diversification Involves acquisition of a business because it represents a promising investment opportunity Primary motivation is profit pattern of venture Difference between the approaches Concentric diversification emphasizes commonality whereas conglomerate diversification emphasizes profits for each individual unit

Turnaround Strategy:

Prof.Sushil\IITD\Session-VI 20 Turnaround Strategy Involves a concerted effort over a period of time to fortify a firm’s distinctive competencies, returning it to profitability

A Model of the Turnaround Process:

Prof.Sushil\IITD\Session-VI 21 Declining sales or margins Imminent bankruptcy Low High Cost reduction Asset reduction Efficiency maintenance Entrepreneurial reconfiguration Stability Recovery Internal factors External factors Turnaround situation Turnaround response Cause Severity Retrenchment phase Recovery phase (operating) (strategic) A Model of the Turnaround Process

Divestiture and Liquidation Strategies:

Prof.Sushil\IITD\Session-VI 22 Divestiture and Liquidation Strategies Divestiture strategy Involves selling a firm or a major component of a firm Reasons for divestiture Partial mismatches between acquired firm and parent firm Corporate financial needs Government antitrust action Liquidation strategy Involves selling parts of a firm, usually for its tangible asset value and not as a going concern

The Strategy of Bankruptcy:

Prof.Sushil\IITD\Session-VI 23 The Strategy of Bankruptcy Two approaches Liquidation - Involves complete distribution of a firm’s assets to creditors, most of whom receive a small fraction of amount owed Reorganization - Involves creditors temporarily freezing their claims while a firm reorganizes and rebuilds its operations more profitably Advantage of a reorganization bankruptcy Proactive option offering maximum repayment of a firm’s debt in the future if a recovery strategy is successful

Corporate Combination Strategies:

Prof.Sushil\IITD\Session-VI 24 Corporate Combination Strategies Joint venture Involves establishing a third company (child), operated for the benefit of the co-owners (parents) Strategic alliance Involves creating a partnership between two or more companies that contribute skills and expertise to a cooperative project Exists for a defined period Does not involve the exchange of equity Consortia, Keiretsus, and Chaebols Defined as large interlocking relationships between businesses of an industry

The Top Five Strategic Reasons for Outsourcing:

Prof.Sushil\IITD\Session-VI 25 The Top Five Strategic Reasons for Outsourcing 1. Improve Business Focus 2. Access to World-Class Capabilities 3. Accelerated Reengineering Benefits 4. Shared Risks 5. Free Resources for Other Purposes

INDIAN BUSINESS HOUSES TATA GROUP:

Prof.Sushil\IITD\Session-VI 26 INDIAN BUSINESS HOUSES TATA GROUP Group Overview India’s largest business house More than 85 companies 39 listed 8% of India’s market capitalization 2.6 Million shareholders 2,70,000 employees Turnover Rs 343 billion (1996-1997)

INDIAN BUSINESS HOUSES TATA GROUP Contd...:

Prof.Sushil\IITD\Session-VI 27 INDIAN BUSINESS HOUSES TATA GROUP Contd... 1996-97 Rs (Billion) 322 343 30 23 40 % change Over 1995-96 18.8 18 -7.1 - 16 19 Financial Highlights Assets Turnover PBT PAT Exports

INDIAN BUSINESS HOUSES TATA GROUP Contd...:

Prof.Sushil\IITD\Session-VI 28 INDIAN BUSINESS HOUSES TATA GROUP Contd... Metals Automobiles Energy Engineering Chemicals Pharmaceuticals Consumer Products Services Agro Industries IT and Communication Exports Finance

INDIAN BUSINESS HOUSES TATA GROUP Contd...:

Prof.Sushil\IITD\Session-VI 29 INDIAN BUSINESS HOUSES TATA GROUP Contd... Tata Heritage Jamsetji Tata Started textile mill in 1877 Inspired steel and power industry Technical education and philanthropy JRD Tata Pioneered civil aviation Funded Hom Bhabha’s nuclear programme Guided the Tata group for over half a century Ratan Tata Present Chairman since 1991

INDIAN BUSINESS HOUSES TATA GROUP Contd...:

Prof.Sushil\IITD\Session-VI 30 INDIAN BUSINESS HOUSES TATA GROUP Contd... Holding Companies Tata Sons Founded by Jamsetji Tata Promoted many of the present Tata companies 63% held by Tata philanthropic trusts Tata Industries 100% subsidiary of Tata Sons founded in 1945 Managing agency till 1970 Promoted new Tata companies in technology based businesses Cross holdings among other Tata companies

INDIAN BUSINESS HOUSES TATA GROUP Contd...:

Prof.Sushil\IITD\Session-VI 31 INDIAN BUSINESS HOUSES TATA GROUP Contd... Restructuring Prompted by post 1991 changing environment Need to identify and focus on core businesses Resistance from satraps Russi Mody, Darbari Seth, Ajit Kerkar Shrink number of companies From over 85 to about 30 Shrink number of core businesses From about 25 to around 10 or 12 Mergers and divestments McKinsey hired as a consultants

INDIAN BUSINESS HOUSES TATA GROUP Contd...:

Prof.Sushil\IITD\Session-VI 32 INDIAN BUSINESS HOUSES TATA GROUP Contd... Restructuring Strategy Keep and grow Power, watches, metals, chemicals, telecom, hospitality, financial services, infotech, emerging services, infrastructure, automobiles Forge strategic tie ups Tea and beverages, retailing Remain only as strategic investors Luxury cars, infotech, printing, cosmetics Sell Refrigeration, paints, textiles, trading, electronics, oil drilling, petrochemicals, pharma, specialty chemicals

INDIAN BUSINESS HOUSES TATA GROUP Contd...:

Prof.Sushil\IITD\Session-VI 33 INDIAN BUSINESS HOUSES TATA GROUP Contd... Recent Developments Voltas focus on air conditioning and engineering business Hive off pesticides business to Ralchem Pesticides (wholly owned subsidiary of Rallis - largest integrated agrochemical company in India) Electrolux Voltas - JV between Voltas and AB Electrolux Refrigerators Washing machines Compressors for refrigerators

INDIAN BUSINESS HOUSES TATA GROUP Contd...:

Prof.Sushil\IITD\Session-VI 34 INDIAN BUSINESS HOUSES TATA GROUP Contd... Recent Developments Tata Tea focusing on global agro business Manages 32 tea gardens in Sri Lanka Adding tea gardens inTurkey Acquired a 9.5% stake in Asian Coffee Overseas Operations Automobile assembly in Bangladesh Instant tea operations in the US Chain of hotels across the world Precision tooling operations in Singapore